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Fraud Prevention, Detection and Red Flags Budget, Accounting and - - PowerPoint PPT Presentation

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Fraud Prevention, Detection and Red Flags Budget, Accounting and Reporting Council May 3, 2018 Sarah Walker, CFE, Fraud Manager O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r Agenda Fraud statistics Red flags

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Fraud Prevention, Detection and Red Flags

Budget, Accounting and Reporting Council

May 3, 2018

Sarah Walker, CFE, Fraud Manager

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

  • Fraud statistics
  • Red flags
  • Case study reviews
  • Credit card best practices
  • Questions

Agenda

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Year Cases Amounts 1989 31 $358,654 1990 15 $120,121 1991 15 $264,027 1992 20 $226,629 1993 18 $642,439 1994 30 $903,304 1995 37 $689,080 1996 48 $958,805 1997 33 $1,540,368 1998 31 $597,479 1999 42 $1,047,113 2000 30 $167,363 2001 68 $484,060 2002 56 $1,122,328 2003 62 $2,253,394

Fraud history

Year Cases Amounts 2004 47 $331,803 2005 57 $258,960 2006 33 $611,711 2007 24 $1,722,207 2008 35 $548,855 2009 53 $2,055,775 2010 75 $1,864,652 2011 50 $1,352,396 2012 64 $3,490,235 2013 59 $1,021,759 2014 64 $797,302 2015 34 $457,120 2016 42 $897,504 2017 74 $434,000 Totals 1,247 $27,219,443

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

  • Deposits not made promptly
  • Mode of payment differences
  • Unusual adjustments
  • Concerns with cost of goods sold
  • Not posting payments to accounts

promptly

  • Safe access not limited

Red flags: Cash receipting

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

  • Unusual vendors
  • Expenditures exceed budget
  • Purchases don’t make sense
  • Missing receipts/invoices
  • Unusual shipping addresses

Red flags: Payments

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

  • Excessive hours paid
  • Unusual amounts of overtime
  • Pay exceeds expectation
  • Changes made after approval
  • Leave cash-outs

Red flags: Payroll

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

  • Missing supporting records
  • Altered documents
  • Lack of review
  • Untimely bank reconciliations
  • Untimely financial reporting
  • Trusted employee!!! (without

adequate monitoring)

Red flags: General

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Study

College Credit card

July 1, 2009 – January 31, 2015

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

How was it detected?

  • The Procurement Department identified

questionable activity during a review of transactions on a credit card issued to a department director.

  • When asked about the questionable activity,

the director acknowledged making purchases for personal use.

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?

  • Our investigation focused on the director’s

credit card purchases from July 2009 through January 2015.

  • 1,651 credit card transactions,

totaling $163,675

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?

  • 1,094 unsupported transactions (issued five

subpoenas)

  • 701 misappropriated transactions, totaling

$50,712

  • 457 questionable transactions, totaling

$46,169

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?

Purchases for:

  • Gift cards
  • Fitness activity trackers
  • Nutrient extracting blender
  • Make up and beauty products
  • Electronics and wireless connection charges
  • Cleaning supplies
  • Clothing

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What did we find?

Purchases for:

  • Watches and jewelry
  • Vacation related expenses
  • Household items
  • Items shipped to an out-of-state relative
  • Gifts
  • Shoes and other accessories

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Where did the money go? How was the fraud concealed?

  • Mostly, it wasn’t
  • In some instances, lack of supporting records
  • Some purchases were from vendors that offered a

wide variety of goods

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Lessons learned: Control weaknesses

  • The Supervisor did not adequately review the

Director’s credit card transactions.

  • Procurement and Accounting Departments were

not adequately monitoring the review and approval of credit card transactions by individual departments to ensure that transactions were legitimate, reviewed and approved before the credit card bill was paid.

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What happened to the employee?

  • She is no longer an employee.
  • We referred our report to the county prosecuting

attorney’s office.

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Were there any red flags?

  • Trusted employee with very little to no oversight
  • Unusual vendors
  • Purchases that didn’t make sense
  • Large volume of transactions/amounts
  • Purchases with an out-of-state “ship to” address
  • Lack of records

Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Study

School district credit card

August 2008 – January 2015

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study

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Timeline:

  • 1977: Subject starts with the

District as a bus driver

  • 2005: Moves into A/P Secretary role
  • 2010: Payroll added to responsibilities
  • December 2014: High School Principal

requests a copy of the District credit card statement

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Our investigation identified:

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Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study

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Examples of personal purchases:

  • Pet supplies ($10,600)
  • Multiple vacations
  • Clothing
  • Shoes
  • Perfume
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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study

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Examples of personal purchases:

  • Cosmetic services
  • Furniture
  • 60-inch LED HD TV
  • Refrigerator (over $3,000)
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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Lessons learned: Control weaknesses

  • The review of expenditures was not

sufficient to ensure all purchases were allowable, for a District purpose and in compliance with District expectations.

  • No supporting statements for credit card

purchases were provided for review.

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Case study

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Procurement and credit cards: Best practices

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Develop a written policy

  • Allowable uses
  • Prohibited uses
  • No personal use
  • Responsibilities
  • Rewards/points use
  • What happens if policy is not followed
  • Have everyone with card responsibilities

sign off on policy

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How to avoid credit/purchase card fraud?

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Records

  • Require original, itemized receipts
  • Think about who will be responsible for retaining them
  • Where are they stored?

Banking controls

  • Consider setting a monthly limit
  • Consider prohibiting certain vendor types
  • Ask if supervisors/Accounts Payable can have read-only

access to credit card account

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How to avoid credit/purchase card fraud?

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Review: Who is responsible for what?

  • Employee
  • Supervisor knowledgeable of activities
  • Accounts payable
  • 100% detailed review
  • Documentation of review

Step-back analysis

  • Who actually needs a card?
  • Is the volume of transactions necessary and reasonable?
  • Does the credit card holder ask for personal

reimbursements?

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How to avoid credit/purchase card fraud?

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Review: What do I look for?

  • Unusual vendors
  • Unusual or unallowable items
  • Large volume of transactions
  • Only the credit card slip, not the itemized receipt
  • Photocopies
  • Scanned documents
  • Missing receipts

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How to avoid credit/purchase card fraud?

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Review: What do I look for?

  • Alterations—bank statement or supporting records
  • Supporting documents with missing information
  • Documentation that does not look professional
  • Invoices that are different than the others from

the same vendor

  • “Ship to” addresses that don’t make sense

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How to avoid credit/purchase card fraud?

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Case study example

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

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“State agencies and local governments shall immediately report to the state auditor’s office known or suspected loss of public funds

  • r assets or other

illegal activity. “

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

What to do if it happens to you:

  • Fill out a report on the Web at www.sao.wa.gov |

Investigations | Fraud Program | Report a Suspected Fraud (RCW 43.09.185).

  • It takes only a few minutes!

Fraud happens

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

Questions?

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O f f i c e o f t h e W a s h i n g t o n S t a t e A u d i t o r

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Contacts

Sarah Walker, CFE Fraud Manager (509) 454-3621 Sarah.Walker@sao.wa.gov Stephanie Sullivan Assistant Fraud Manager (509) 662-0440 Stephanie.Sullivan@sao.wa.gov Sadie Armijo, CFE Assistant Director of Local Audit (360) 902-0362 Sadie.Armijo@sao.wa.gov